"Vaping" a slow burner in China, world's maker of e-cigarettes

By Adam Jourdan

6 Min Read

Electronic cigarettes are pictured at a production line in a factory in Shenzhen, southern Chinese province of Guangdong January 15, 2014.Tyrone Siu

SHANGHAI (Reuters) - When Qu Liang's wife became pregnant, the 30-year-old Shanghai salesman switched from smoking to "vaping", a practice uncommon in China although it is the world's leading producer of electronic cigarettes.

E-cigarettes were invented about a decade ago by a Chinese medical researcher and the country supplies nearly all global demand. Puffing on the devices, or vaping, is surging worldwide, but it forms only a tiny part of China's 1.2 trillion yuan (about $200 billion) cigarette business.

Now, rising public awareness about the hazards of smoking, coupled with China's hardening stance on smoking in public, is opening up an opportunity for e-cigarettes to make inroads into the world's biggest tobacco market.

"As more and more places become off limits to smoking, I find myself using e-cigarettes more often," said Qu. Since starting using the product six years ago for health reasons, Qu has started selling e-cigarettes himself, expanding the business from exports to the domestic market this year.

E-cigarettes are mostly sold online in China, where government regulation around the product is still lax. Countries like Singapore and Brazil currently ban e-cigarettes.

Vaping is potentially a healthier alternative to smoking as the absence of combustion averts some of the harmful side-effects of tobacco smoke. But a big issue is the lack of long-term scientific evidence to support the safety and effectiveness of e-cigarettes, prompting critics like the British Medical Association to warn of the dangers of their unregulated use.

Nevertheless, the e-cigarettes market is growing fast, although it is still only a tiny proportion of the global tobacco business. Last weekend, Hollywood stars Leonardo DiCaprio and Julia Louis-Dreyfus were seen smoking e-cigarettes at the globally televised Golden Globes awards ceremony.

Some analysts predict e-cigarettes could outsell conventional cigarettes within a decade, particularly as Big Tobacco grapples with declining sales due to government regulation and health-aware consumers.

E-cigarette sales in the United States grew at 115 percent each year between 2009 and 2012, and could grow us much as 240 percent this year, according to experts. The global e-cigarette market could increase fivefold to $10 billion by 2017, according to some estimates.

CHINA'S TANTALISING MARKET

For Chinese manufacturers of e-cigarettes, while the export market is surging, the domestic potential is tantalizing.

Even a tiny portion of its 300 million-plus smokers would offer an attractive prize. In 2012, Chinese smoked a total of 2.46 trillion cigarettes - 4.8 per person, per day - and the country accounts for one-third of global consumption.

A employee works at a production line in an electronic cigarettes factory in Shenzhen, southern Chinese province of Guangdong January 15, 2014.Tyrone Siu

"The harsher control of tobacco is great news for electric cigarettes," said Lai Baosheng, general manager of e-cigarette maker Smoore, adding lax smoking rules in China had previously slowed the development of the business.

Beijing has moved to clamp down on smoking, reinforcing a ban on officials smoking in public and increasing the price of tobacco by 5 percent this month. Health authorities said they would enforce a ban on smoking in public places nationwide this year - a law that has long been in the works.

Smoore shipped over 100 million e-cigarettes to mostly Europe and the United States in 2013 with a sales value of 800 million yuan, double the level a year before, although Lai says the company is starting to eye the opportunity within China as smoking rules harden.

Analysts say China's domestic market would have to eventually open up to e-cigarettes.

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"There's an unavoidable logic here that eventually no one will smoke regular tobacco on this planet," said Shane MacGuill, London-based tobacco analyst at Euromonitor.

"China won't be able to become a kind of ghetto of tobacco, so there will have to be some movement towards an alternative, though how soon it's going to happen I'm not sure. It will happen but it will take longer."

Tobacco companies such as British American Tobacco Plc and Philip Morris International Inc as well as independent U.S. firms already source e-cigarettes from China. But e-cigarettes could also give them entry into the Chinese market - currently tobacco sales in China are largely governed by a state monopoly.

Tobacco imports made up less than 1 percent of China's market in 2012, according to Euromonitor, with the China National Tobacco Corporation dominating 98 percent of the domestic market, according to a paper from Brookings.

With China's large state-owned tobacco firms largely steering clear of e-cigarettes - only one has made an obvious mention of looking into the technology - global Big Tobacco could target wealthier, more health-conscious smokers in China's urban centers.

But regulation of China's e-cigarettes market is still in flux, and there are serious obstacles, not least China's reluctance to risk losing the massive tax revenues currently derived from regular tobacco. The country could also decide to control any e-cigarette market as strictly as it does the traditional tobacco industry, leaving little room for outside players.

"Nonetheless, I think it has to be seen as a potential way in to the Chinese market," said Eddy Hargreaves, tobacco analyst at Cannacord Genuity.

"The potential generally is huge and we'd expect it (to catch on in China), albeit it at a slower rate to the United States and Europe." ($1 = 6.0412 Chinese yuan)